National Blog

The Directive: a detective novel about....The Fed?

Thanks to Ralph Benko at Forbes.com for bringing The Directive, a new mystery thriller from author Mathew Quirk to our attention. The Directive centers around an attempt to discover whether the Fed's Open Market Committee is going to direct to the New York Fed's trading desk to raise or lower interest rates.

Mr. Benko points out that the idea that once could profit from having advanced knowledge of changes in monetary policy is not that far-fetched:

Lest anyone doubt the power of such insider information consider William Safire’s report, from his White House classic memoir Before the Fall, of the weekend at Camp David before Nixon “closed the gold window.”

After the Quadriad meeting, the President remained alone while the rest of the group dined at the Laurel Cabin. The no-phone-calls edict was still in force, raising some eyebrows of men who had shown themselves to be trustworthy repositories of events. but the 6’8″, dour Treasury Under Secretary Volcker explained a different dimension to the need for no leaks: “Fortunes could be made with this information.” Haldeman, mock-serious, leaned forward and whispered loudly, “Exactly how?” The tension broken, Volcker asked Schulz, “How much is your budget deficit?” George estimated, “Oh, twenty three billion or so — why?” Volcker looked dreamily at the ceiling. “Give me a billion dollars and a free hand on Monday, and I could make up that deficit in the money markets.”

Some of the quotes from Martin Quirk that Mr. Benko reprints suggest that this book, while not embracing the Austrian perspective, could be a good tool to getting someone interested in learning more about the Fed and may even motivate people to support Campaign for Liberty’s efforts to Audit the Fed:

Quirk:

he Fed is by design very friendly to large New York banks. When the committee in DC decides what interest rates should be, they can’t simply dictate them to the banks. They decide on a target interest, and then send the directive to the trading desk at the New York Fed to instruct them about how to achieve it. The traders upstairs go into the markets and wheel and deal with the big banks, buying and selling Treasury bills and other government debts, essentially IOUs from Uncle Sam. When the Fed buys up a lot of those IOUs, they flood the economy with money; when they sell them, they take money out of circulation.

They are effectively creating and destroying cash. By shrinking or expanding the supply of money in the global economy, making it more or less scarce, they also make it more or less expensive to borrow; the interest rate. In this way, trading back and forth with the largest banks in the world, they can drive interest rates toward their target.

The amount of actual physical currency in circulation is only a quarter of the total monetary supply. The rest is just numbers on a computer somewhere. When people say the government can print as much money as it wants, they’re really talking about the desk doing its daily work of resizing the monetary supply—tacking zeros onto a bunch of electronic accounts—that big banks are allowed to lend out to you and me.

***

Every morning, on the ninth floor of the New York Fed, the desk gets ready to go out and manipulate the markets according to the instructions laid out in the directive. Its traders are linked by computer with twenty-one of the largest banks in the world. When they’re ready to buy and sell, in what are called open market operation, one trader presses a button on his terminal and three chimes — the notes F-E-D — sound on the terminals of his counterparties. Then they’re off to the races.

There are usually eight to ten people on that desk, mostly guys in their late twenties and early thirties, and they manage a portfolio of government securities worth nearly $4 trillion that backs our currency. Without it, the bills in your wallet would be as worthless as Monopoly cash. The traders on that floor carry out nearly $5.5 billion in trades per day, set the value of every penny you earn or spend, and steer the global economy.

I was casting about for the biggest hoards of money in the world, and you get to the Federal Reserve Bank in New York fairly quickly. But that’s been done. Then I learned more and more about the trading desk, and my mind was blown.

You get to have this great line where you say, “There’s $300 billion worth of gold in the basement, but the real money is on the ninth floor.” …

I was a reporter in Washington for a while, and I thought, “Oh, the Fed sets interest rates,” because that’s always what people say. But as you dig into it, you realize that the Fed just has to induce interest rates to where they want to be. They have to trade back and forth with these 19 or 20 banks, and they have 8‑10 guys at this trading desk, trading about $5.5 billion a day. That’s actually how the government prints money and expands and contracts the monetary supply.

It’s this high wire act. You explain it to people and they say, “Oh, it’s a conspiracy thriller.” You say, “No, no. That’s the real part. I haven’t gotten to the conspiracy yet.” But it’s a miracle that it works.

The fact that the Fed's operations is now the subject of detective novels is more proof of the success of Ron Paul and his supporters in making the Federal Reserve and monetary policy a major issue for the first time since the Federal Reserve's creation.

Please help Campaign for Liberty's efforts to solve the big mysteries surrounding the Fed by helping us pass Audit the Fed (HR 24).